Are Some Index Funds Ripping You Off?
High fees hurt returns.
Index funds are often touted as great investment vehicles for their tax efficiency and low fees. Even Benjamin Graham, the founder of value investing, or trying to pick underpriced securities, thought indexing, or just passively tracking the market, was a reasonable idea for most investors, although this didn't mean he thought the market was efficient. Graham knew most actively managed mutual funds weren't able to overcome their fees and beat the index.
Most investors assume, however, that indexing automatically means getting a cheap fund and certainly one that's cheaper than an actively managed fund. However, this isn't necessarily the case. Just as with buying actively managed funds, indexers need to shop around, because fees vary fairly widely.
We recently screened for funds that tracked the S&P 500 Index in Morningstar's database and were especially impressed with the disparity in fees among funds that track the S&P 500 Index. We came up with 85 funds and found that their average net expense ratio with fee waivers was around 0.40% or 0.41%, depending on whether you use the fund's most recent prospectus or its most recent annual report. (Morningstar.com uses the most recent annual report to list funds' fees.)
John Coumarianos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.